MiCA, otherwise known as the European Union’s Markets in Crypto-Assets Regulation, has forged ahead as the world’s first crypto bespoke regulatory framework governing markets in cryptoassets. Notably, against a global backdrop of tightening sustainability standards and regulatory scrutiny, the final MiCA deal included, among its agreed provisions, a defined commitment to implementation of cryptoasset-specific sustainability disclosures – making the EU the first geography globally that will have binding sustainability disclosure requirements applied to providers of cryptoasset services.
In this article, we share the outline of the current proposals, and written feedback supplied by Zumo to the European Securities and Markets Authority (ESMA) on its proposed approach. The content of this response was submitted under the auspices of the Emerging Technologies Sustainability Taskforce (ETST), with core input from Zumo authors Kirsteen Harrison, Sustainability Director, and Daniel Taylor, Research & Policy Lead.
What are the proposals?
ESMA presents the overview of its intended approach as follows (wording is taken directly from the ‘Package 2’ MiCA implementation consultation paper, which can be read in full here). In essence, the proposals pick up the mandate for disclosures relating to cryptoasset climate impacts to be included in public white paper and website descriptions, and the way this should be assembled and presented:
“Content, methodologies and presentation of sustainability indicators on adverse impacts on the climate and the environment
- Articles 19(1), 51(1) and 6(1) of MiCA respectively introduce disclosure requirements related to principal adverse impacts on the climate and other environment-related adverse impacts of the consensus mechanism used to issue the crypto-asset, as part of the white papers for asset-referenced tokens (ARTs), for e-money tokens (EMTs) and for crypto-assets other than ARTs and EMTs. These disclosure requirements apply to persons drawing up the crypto-asset white paper referred to in Articles 6, 19 or 51 of MiCA. In particular, operators of trading platforms shall ensure by 31 December 2027 that a crypto-asset white paper is drawn up, notified, and published in relation to cryptoassets other than ARTs and EMTs that were admitted to trading before 30 December 2024. For ease of reference, they will be referred to as ‘persons drawing up cryptoasset white papers’ throughout this consultation paper.
- Article 66(5) also requires Crypto-Asset Service Providers (CASPs) to make such information available in a prominent place on their website for all the crypto-assets in relation to which they provide services, regardless of whether the information can be obtained from white-papers.
- Articles 6(12), 19(11), 51(15) and 66(6) require ESMA to specify the content, methodologies, and presentation of the information in respect of the sustainability indicators in relation to adverse impacts on the climate and other environment‐related adverse impacts, taking into consideration the various types of consensus mechanisms used to validate transactions in crypto-assets (including their characteristics and the differences between them) and their incentive structures. Such sustainability indicators should cover the use of energy, renewable energy and natural resources, the production of waste and greenhouse gas emissions.
3.2.1 Description of the consensus mechanisms
- The mentions of consensus mechanisms in MiCA refer indifferently to the issuance of crypto-assets and the validation of transactions in crypto-assets. ESMA understands that the primary objective of a consensus mechanism is to validate transactions in crypto-assets, and that the issuance of a crypto-asset can be the ultimate result of this operation of validation.
- For the purpose of assessing the sustainability impacts of the consensus mechanisms, it is therefore suitable to focus on the validation of transactions in crypto-assets, as per the definition of ‘consensus mechanism’ in article 3(1)(3) of MiCA, and to assume that this validation is conflated with the issuance of a crypto-asset.
- A description of the consensus mechanism(s) used to validate the transactions, and its/their incentive structures, is the starting point for persons drawing up crypto-asset white papers and for CASPs to better articulate their sustainability impacts.
- The policy discussions at the time of the political agreement on MiCA were largely focused on the comparative impacts of the incentive structures linked to Proof of Work and Proof of Stake mechanisms. Proof of Work consensus mechanisms, typically associated with incentives based on the use of computing power, can be deemed more impactful from a sustainability point of view. However, disclosure requirements should not be limited to a specific sub-set of consensus mechanisms but should capture all current and future types of consensus mechanisms. Consensus mechanisms will be identified in the part of the white papers on information on the underlying technology, as prescribed in Annexes I, II and III of MiCA.
- Assessing the sustainability impacts of consensus mechanisms is understood as assessing the cumulative sustainability impacts of the set of DLT network nodes active in reaching an agreement that a transaction is validated.
- The sustainability impacts of consensus mechanisms are not only linked to the validation of transactions, but also to the use of energy and resources needed to maintain the integrity of the information stored on the ledger. As certain crypto-assets rely on a multi-layered structure encompassing different types of consensus mechanisms, the sustainability impacts of each consensus mechanism used in the different layers should be properly assessed and disclosed accordingly.
3.2.2 Data availability and reliability
- Sustainability disclosures are an integral part of the MiCA rulebook, and full compliance with these disclosure requirements will be expected from all entities wishing to engage in the issuance, offer to the public and admission to trading of crypto-assets and in the provision of services related to crypto-assets in the Union.
- ESMA recognises the challenges associated with collecting granular data on sustainability matters in light of the global and decentralised nature of activities related to crypto-assets, in particular for public and permissionless consensus mechanisms. These challenges are by and large similar to the challenges that entities in scope of the Corporate Sustainability Reporting Directive (CSRD) and the Sustainable Finance Disclosure Regulation (SFDR) face, some of which may be persons drawing up cryptoasset white papers or authorised as CASPs in the future.
- ESMA also notes that a growing number of entities active in crypto-asset markets are voluntarily disclosing information on their sustainability impacts, including comparisons between crypto-assets, and using third-party sources to draw up such sustainability statements.
- Based on an initial analysis of the academic body of research to date and of the methodologies currently used by providers of sustainability data in relation to cryptoassets, ESMA considers that the sustainability impact of the consensus mechanisms can be anchored in three main features of the DLT network nodes: 1) the energy consumption of each DLT network node; 2) their location; and 3) the devices that each DLT network node uses both to take part in the DLT network, such as application specific integrated circuits (ASICs), and to hold a replica of records of all transactions on a distributed ledger, including servers and equipment used to maintain their integrity.
- In particular, the location of the DLT network nodes may be used as a proxy to estimate greenhouse gas (GHG) emissions, while the waste production and the use of natural resources throughout the lifecycle (production, use and disposal) of the hardware equipment of each DLT network node can be assessed.
- Persons drawing up crypto-asset white papers and CASPs will be expected to identify these main features and combine them with relevant datasets (e.g., on countries’ energy mixes and on lifecycle assessments for hardware equipment), in order to obtain comparable and reliable assessments of the sustainability impact of consensus mechanisms.
3.2.3 Indicators, methodologies and presentation of the information
- Early experiences from sustainability reporting requirements under CSRD and SFDR and initial feedback from external stakeholders indicate that comparability is best ensured with indicators based on harmonised quantitative metrics, as opposed to qualitative disclosures.
- Such quantitative metrics should be anchored in common methodological principles, inspired from existing CSRD and SFDR frameworks and relevant international initiatives. Further work is foreseen at the EU level on these methodologies, including through a call for tender on ‘Developing a Methodology and Sustainability Standards for Mitigating the Environmental Impact of Crypto-assets’ launched in September 20232 .
- Sustainability disclosure requirements are an integral part of the requirements to draw up white papers, and as such will be covered by the requirements on the presentation of the information in the relevant ITS under Articles 6(11), 19(10) and 51(10).
- It is necessary to further specify how the information on sustainability indicators will be presented on the website of CASPs, as this is not extensively covered in MiCA.”
Our response in full
Q1: Do you agree with ESMA’s assessment of the mandate for sustainability disclosures under MiCA?
We thank ESMA for the opportunity to respond to the ‘RTS on content, methodologies and presentation of sustainability indicators on adverse impacts on the climate and the environment’. The ETST strongly supports the further development of sustainability disclosures and frameworks. We are supportive of ESMA’s intent to provide clarity to the market, and broadly support the proposed mandate for sustainability disclosures in principle. However, there remain a number of unanswered questions – some of which are significant – that we would like clarity on before endorsing.
The key areas that we seek clarity on are as follows.
- Proportionality – The consultation document includes references to CSRD and SFDR (items 27 and 28) and states that ‘proportionality is already embedded in these requirements from the outset’. We seek clarity as to how proportionality has been embedded. For example, it would be useful to make available the process for determining ‘proportionality’, noting that this RTF applies to all CASPs (with only a very limited exclusion for MiCA white paper reporting requirements (MiCA Art. 27)). Consequently, the reporting threshold suggested by the current proposals does not compare with the CSRD’s high threshold for applicability (with phased in compliance by size of reporting entity, and direct exclusions for non-listed SMEs). On this basis,we consider that the lack of an equivalent threshold / de minimis for reporting (both at reporting company level and at the environmental significance level) leads to questions over the ‘proportionality’ of the disclosure requirements. We welcome clarification on how this is addressed. Further, having understood from this RTS that disclosure requirements will mirror the trigger points for white paper drafting, we would also appreciate confirmation that (a) the white paper exclusion criteria outlined in MiCA (27) apply also to these proposals (b) we could assume that the additional website listing requirement is subject to the same exemptions as the white paper requirement.
- Alignment with ESRS E1 – Further to the comment on ‘proportionality’ above, we invite clarity on the alignment of the mandate for sustainability disclosure under MiCA and that under CSRD (primarily ESRS E1). The language between the two is notably inconsistent, and whilst we appreciate this may be due in part to the need for ‘proportionality’, it does appear that the selective reporting of ‘non-renewable energy’ only (ESRS E1 also includes a requirement to report ‘renewable energy’) and the use of the term ‘adverse impacts’ as opposed to ESRS E1’s language of ‘material positive and negative actual and potential impacts’ presents a negative skew to the reporting required in this RTS. Moreover, the current reporting templates do not allow for the reporting of improvements (in energy efficiency, procurement of renewables etc) and therefore do not incentivise this. Currently, we view this as an incomplete if not misleading implementation of the retail investor information mandate, and recommend that in line with CSRD, material positive and negative actual and potential impacts are included. Further, the EU appears to be creating an imbalance in the application of legislation by pressing forward with this sustainability RTS under MiCA whilst postponing other sector-specific standards for CSRD purposes.
- Scope (financial institutions and non-qualifying digital assets) – From MiCA Art (9), we understand that digital assets that would be defined as financial instruments are excluded from MiCA scope (and therefore these requirements). We seek clarification as to whether blockchain/DLT-issued tokenised securities, financial instruments and the wider scope of digital assets (e.g. CBDC) that are not treated as qualifying cryptoassets will be treated on an equivalent basis in terms of sustainability disclosures and language, and what measures have been considered to achieve this. As a forward-looking question, we also ask for clarification on the treatment of cryptoasset fund products as opposed to direct purchase of cryptoassets, where we observe there might be an unintended inequality between a retail investor investing directly in a qualifying cryptoasset, and investing in a financial instrument such as an exchange traded fund that gives exposure to the underlying qualifying cryptoasset. Intuitively, retail investors require the same disclosures in both instances, even if the fund product itself is not a qualifying cryptoasset.
- Data requirements – Separate reporting of scope 1 and 2 may not be workable at network level for certain public blockchains that are sufficiently decentralised to preclude gathering individual actor level data. We recommend instead that a ‘Total network carbon footprint’ figure is more appropriate. Not only does including Scope 1 and 2 reporting requirements lead to confusion (to the CASP these are of course Scope 3), it is hard to interpret what added value these metrics would bring to a retail investor audience (as opposed to ‘total carbon footprint’), in line with the stated purpose of the MiCA white paper concept (Art 24): “In order to ensure their protection, prospective retail holders of crypto-assets should be informed of the characteristics, functions and risks of the crypto-assets that they intend to purchase.”
- Audit – We believe the omission of requirements / guidelines for audit from the RTS should be addressed. We recommend that the RTS should provide a clear definition of audit expectations including what needs to be audited, by whom and to what standard. For example, an audit that simply verifies data may be of little use in many cases – instead, the audit function needs to encompass methodology, assumptions, data accuracy, and in some instances may also include code. We recommend that clarity on audit requirements is provided.
Finally, a key point on overall scope & structure: Following discussions with other parties who are also responding to this consultation, we have reached the conclusion that Tables 1 and 2 provide indicators to be used in relation to the entire cryptoasset network by each CASP who issues / trades that cryptoasset. Thus our understanding is that ALL CASPs would report the same metrics for each cryptoasset, irrespective of the CASP size or network share. Our responses are based on this understanding. However, we note that the terminology in Table 1 (use of ‘Scope 1’ and ‘Scope 2’) conflicts with this interpretation, given it would be applicable to miners / validators who directly use electricity in nodes – data which is almost unobtainable in public blockchain contexts. We have used best endeavours to respond appropriately but accept that we may not have fully interpreted all aspects of the consultation as ESMA has intended them.
The above points relate directly to the content of the consultation document, but we would like to provide additional thoughts at the onset about important questions that we believe are not addressed in the package, and for which we believe answers are important to address in parallel to the questions in the consultation. These are:
- Mapping – Has a full mapping exercise of MiCA requirements against other relevant EU requirements (e.g. ESRS E1, SFDR) been conducted? If so, where are the differences, and why do they exist? We explore the key differences in our response, but a mapping exercise to explain these differences would be helpful.
- Industry-specific mandate – Why has an industry-specific mandate been issued only for the crypto / digital asset sector at this time? The EU appears to have postponed sector-specific standards for CSRD purposes, yet MiCA is essentially a sector-specific mandate.
- Outcomes – What are the expected outcomes of this sustainability RTS? How exactly does the mandate lead to positive change, rather than simply reporting adverse metrics?
- Cost/benefit analysis – A cost benefit analysis has not been clearly disclosed, and the reasons for not including this analysis would be useful. Global standard-setting often includes both a focus on and process for assessing the costs (as well as the benefits) of proposed and final standards. We invite clarity on this aspect of the proposed requirements.
We strongly encourage ESMA to consider these questions alongside those asked in the consultation.
Q2: In your view, what features of the consensus mechanisms are relevant to assess their sustainability impacts, and what type of information can be obtained in relation to each DLT network node?
Our comments here are split into two separate areas – technical comments (points 1-2) , and comments related to sustainability impacts (points 3-5)
- Categorisation by consensus mechanism – as the successful mining of some cryptocurrencies such as Bitcoin requires specialist equipment, whereas others can simply be validated using a standard laptop, we strongly encourage differentiation by consensus mechanism and a proportionate approach. For example, in Proof of Work (PoW) consensus mechanisms, detailed information on the hardware is required for accurate reporting. In a fully decentralised system with free access, such as Bitcoin, geographical distribution (as granular as possible) is required to determine grid energy mix. Other consensus mechanisms may have a capped number of validators which makes it much easier to pinpoint location. This raises the fundamental point: Table 1 would benefit from being adjusted so that it does not treat all consensus mechanisms the same. In some instances, the Table 1 metrics might not actually provide meaningful information for a given mechanism. It is also worth considering a ‘de minimis’ threshold point at which requirements apply, so that the wood isn’t lost for the trees in terms of trying to track blockchain environmental impact.
- DLT node definition – We seek clarity as to the scope of the definition of ‘DLT node’. There may be a number of different types of nodes on public blockchain networks – light nodes, full nodes, archive nodes etc – added to which certain participants may additionally elect to act as validators or miners depending on the network in question. Not all network participants will operate the same kind of node, and some network participants (including private individuals) may operate only a single or small number of nodes for the purpose of monitoring and interacting with a given blockchain network (i.e. without participating as validators or miners). Arguably, in many cases, operating a non-validating/non-mining ‘node’ will be indistinguishable from everyday IT equipment from an energy use perspective. We encourage proportionate disclosures in relation to nodes, and clarification as to which are in scope, with the basic point that in public blockchains energy consumption is primarily a function of participation in the network as a miner or validator, given the increased hardware requirements and electricity consumption associated with this activity, and not simply the act of maintaining a network node.
- ‘Adverse impacts’ focus of metrics – We also suggest that by focusing solely on ‘adverse impacts’ (principally in relation to energy and climate) the sustainability disclosures will not give a complete picture. For example (and as explored in depth in the WEF ‘Guidelines for Improving Blockchain’s Environmental, Social and Economic Impact’(2022), led by Dr Cathy Mulligan, one of the authors of this consultation response), it is crucial to take a unified approach when assessing the impact – one that balances environmental, social and economic effects. A reduction in energy usage may be accompanied by a corresponding decrease in security. More readily available figures for energy use may be accompanied by a decreasing level of decentralisation. Energy use does not tell the whole story, and focusing on this metric at the expense of others risks giving an incomplete picture at best and a flawed picture at worst.
- Transaction based metrics – The discussion paper places a heavy emphasis on a per transaction model, which we consider particularly unsuited for PoW blockchains such as Bitcoin. As respected sources have pointed out in the past (CCAF, p.83), energy consumption is not causally linked with transaction volume: the bulk of miner incentivisation comes not from transaction fees but from block rewards. Whether a block is empty or full, the energy cost of producing it will be the same and, were transaction throughput hypothetically to increase by an accepted alteration to protocol rules, this would not fundamentally alter the energy required for the network to function. Further, what constitutes a ‘transaction’ may be difficult to determine, given that a single on-chain Bitcoin transaction may conceal hundreds of ‘bundled’ offchain transactions from an exchange or Layer 2 solution. This belies the crux of the point: Bitcoin’s energy consumption is not for transaction validation per se, but rather the ‘security budget’ that allows for consensus in a highly adversarial context. This is tied to miner proof of work, and not transaction processing. Certainly for Bitcoin and proof of work, we therefore question a primarily transaction-based lens, which we consider has been sufficiently discredited by the collective industry to be detrimental to proper investor information. We refer back to our point in the introduction about the need for consensus mechanism specific consideration.
- Encouraging positive action – Given the purpose of these disclosures, i.e. unbiased investor information, consideration should be given as to whether the information given is effective in providing the appropriate context to retail investors. At the moment, it seems lacking that no information is provided around renewable shares in blockchain electricity consumption, the initiatives that are being undertaken to advance this, and any year-to-year comparison that would be able to illustrate progress over time. Put simply, the current proposals for Table 1 and Table 2 disclosures do not incentivise positive action to be taken by CASPs. Presenting only the negative externalities does a disservice to the evolution of a fledgling technology and lessens the chances of positive coordinated action. We strongly recommend that ESMA seeks the views of practitioners in the industry on the positive developments in this area – the ETST would welcome the opportunity to feed into this process.
Q3: Do you agree with ESMA’s approach to ensure coherence, complementarity, consistency and proportionality?
The ETST agrees with the need to identify and mandate proportionate disclosures and metrics in a timely and effective way in light of the sector’s growth and potential significance, both to the climate and to the EU economy. However, we do not agree with the approach set out in its current form.
- To elaborate further, points 25-28 of the discussion document at first sight appear to lay out the considerations clearly. For example: ‘The definitions and concepts in the MiCA disclosure requirements are aligned, to the extent possible, with rules in respect of the CSRD and SFDR’. However, no further information is given on the process of alignment, and why alignment was chosen against certain features of CSRD (e.g. reporting of non-renewable electricity) but not others (e.g. reporting of renewable electricity).
- We invite ESMA to share the process followed to ensure coherence and complementarity. Particularly, we note Art 66 of the MiCA mandate, which specifically calls out the consideration of use of renewable energy: “When developing the draft regulatory technical standards referred to in the first subparagraph, ESMA shall consider the various types of consensus mechanisms used to validate crypto-asset transactions, their incentive structures and the use of energy, renewable energy and natural resources, the production of waste and greenhouse gas emissions.” We consider the lack of reporting of renewable electricity in these proposals a failure of the MiCA mandate, and ask for this to be addressed in the consultation response.
- It is notable to the reader that the ESMA consultation focuses disproportionately on ‘adverse impacts’ and, while we support the mandatory disclosure of relevant sustainability indicators, we find the sole focus on ‘adverse’ to be problematic. ESRS E1 has a broad and non-emotive scope – ‘how the undertaking affects climate change, in terms of material positive and negative actual and potential impacts’. It allows for risks and opportunities to be described qualitatively as well as quantitative information to be provided. Crucially, the wording of CSRD allows disclosing companies the opportunity to state what choices they have made to reduce energy consumption (or procure renewables), whereas the ESMA proposal stipulates energy consumption as a standalone metric which cannot be contextualised.
- We wish to re-emphasise the point made about proportionality and thresholds in response to Q1. The RTS makes it clear that the guidance applies to ALL consensus mechanisms, regardless of efficiency, size or electricity consumption. Given that some consensus mechanisms use very little energy to function (c.f Proof of Stake etc) we encourage consideration of thresholds / exclusions for certain situations. By way of an example, the electricity consumption of the entire Ethereum network reduced by more than 99% after the Merge, and is now estimated to consume approx 6-7 GWh of electricity annually. According to the Cambridge Centre for Alternative Finance, this is comparable to the annual energy usage of the Eiffel tower or British Museum. We are therefore concerned that (a) cryptoassets will receive a disproportionate treatment as against other activities in the general ICT realm (b) reporting overreach will obscure the areas of genuine concern where progress must be made with an overwhelm of non-consequential disclosures. We recommend a consideration of a qualification threshold based on network electricity consumption.
- It appears from point 28 that proportionality has been considered as only a sub-set of information required from CSRD has been included in MiCA. However we believe that doing this may have two unintended outcomes: (1) the indicators are skewed to the negative, presenting a challenge to investors who wish to use disclosures to assess which CASPs / cryptoassets are taking positive action (as discussed above) (2) The threshold for reporting companies to CSRD is high (based on turnover / assets / staff numbers) whereas there is no proportional/equivalent threshold for MiCA. This will have a disproportionate effect on smaller companies which may not have large compliance or sustainability teams. As set out in our response to Q1, we recommend that mapping against CSRD and SFDR is made available.
- Again, as highlighted in Q1, we invite ESMA to elaborate on the outcomes desired from MICA reporting. We would invite a similar approach as that found in ESRS 1, for example, where the objectives of the standard are clearly laid out, and where both positive, as well as negative information is required, along with trends and improvements over time.
Q4: Do you agree with ESMA’s approach to mitigating challenges related to data availability and reliability? Do you support the use of estimates in case of limited data availability, for example when data is not available for the entirety of a calendar year?
The approach proposed in section 3.3.2 sounds broadly sensible but it raises a number of questions. If we are correct in our understanding that all CASPs will need to report data in respect of the entire network for each cryptoasset they hold / trade, then this implies there will need to be consistency of data across CASPs. If CASP A reports on the same cryptoasset as CASP B, but each uses a different data source and set of assumptions they could quite legitimately report very different results. This will not support investor disclosures, and may in fact have the opposite effect of creating market uncertainty.
- It is therefore very important that there is consistency in data – and that there is some mechanism in place to achieve this, such as a facility to draw on approved, audited material from trusted providers, or an industry agreed standard. The mandate may correctly encourage new tools and data sources to arise that will assist preparers and users of the required information by encouraging additional attention to the data requirements and data quality themselves. Models and assumptions underlying the data utilised by reporting entities will be key for the users of the reported metrics to make sense of them and appropriately use them in valuation and other contexts. As with financial reporting, analysts need a deep and broad understanding of whether a given number is an estimate or an observed value, and ultimately how each of the metrics can be assessed for quality. The point made on audit in Q1 is pertinent here
- We strongly suggest that focus is placed on proportionality when looking at the resources needed to gather, analyse and report on data. For ARTs, EMTs & cryptoassets other than those with low electricity consumption / low carbon footprint it is reasonable to assume that estimates could be used. For those that are known to have the highest electricity consumption (e.g. BTC), quality of data becomes more important.
- Because a degree of clarity is still required around what data will be reported in practice, and where estimates are allowed, our response here is limited. However, we encourage consideration of the difference between a respected industry standard estimate (e.g CCAF) and an internal estimate which has the potential to be deliberately played down by an unscrupulous CASP.
- Estimates are a common feature of corporate reporting more broadly. Reporting entities and the users of the information are used to dealing with them for financial reporting. There are recognised areas that are clearly understood to be estimates (that may rely on management judgement). Sustainability estimates may be a necessary component of the current requirements, but then much should be learned and embraced from how financial reporting estimates are prepared, audited, and ultimately used. The clarity required in the notes to the financial statements for ‘Level 3 Fair Value’ is an excellent example of how regulators could seek to ensure that enough information is made available about any estimate’s key inputs, assumptions and judgements to be truly decision useful.
- We agree with ESMA’s proposal that the use of 3rd parties to validate disclosure data is indicated. However this in itself raises certain questions – what standards will auditors be auditing against, and what level of competence in MiCA / CASPs / cryptoassets / consensus mechanisms will they be expected to have? Disclosure as to qualifications of auditors, and level of assurance (reasonable or limited) should be included rather than simply a blanket statement about 3rd party assurance. As a contextual point, third party audit at the CASP level (as indicated in Table 1) is likely to be useful only where a CASP is using data to complete its own calculations as opposed to drawing on data for a well known cryptoasset from a primary industry source. More pertinent is audit of the data, methodology and assumptions that is provided to CASPs in order to fulfil their white paper requirements.
- In relation to point 42 ‘notably when the same cryptoasset is admitted to different trading platforms’ – this implies the need for further guidance around reporting. This can quickly become quite complex. Relevant considerations include: 1/ Clear guidance on what constitutes a qualifying cryptoasset 2/ Clear disclosure treatment for crypto ‘tokens’ which rely on an underlying blockchain for transaction processing and constitute a large majority of the current landscape of cryptoassets. 3/ Clear disclosure treatment for when a token (e.g. USDC) is made available on multiple different blockchains 4/ Clear disclosure treatment for ‘Layer 0’ blockchains that allow for shared security to be inherited on application-specific ecosystem blockchains 5/ Clear disclosure treatment for ‘Layer 2’ blockchains that rely on a ‘Layer 1’ blockchain for functions of data availability and settlement. This kind of modularity or ‘borrowing’ of certain functionality from one blockchain for another blockchain to function clouds the definition of scope reporting – what is scope 1, 2 and 3 to whom? We suggest a lot of headaches could be avoided by simply defining a ‘de minimis’ environmental threshold for reporting, considering that in many of these instances, component activity (e..g Layer 2 transaction execution) will be trivial in terms of energy usage, and the burden of environmental impact likely falls on the infrastructure components that are providing settlement/security assurance.
- Finally, and as highlighted as a key issue in response to Q1 – what is the role of audit in the data and metric reporting requirements? This is one of the key areas that does not appear to be fully addressed in the consultation. Regulators, reporting entities, users, auditors, and long-term sustainability metric experts likely should be brought together for extensive discussions and decisions about how exactly the required information can be effectively audited (especially given the presence of extensive estimates of metrics that have not been in use or audited over an extensive period of time). Clearly, there have been efforts to discuss and address this, however we invite deeper and more substantive discussions that publicly lay out the areas in which effective audits (and therefore, reliable reported information) may be required.
Q5: What are your views on the feasibility and costs of accessing data required to compute the sustainability metrics included in the draft RTS?
On the matter of cost, we see two key types of costs to consider:
- Costs of the reporting entity (CASP) to retrieve/ purchase data from a reliable source/tool
- Costs of the data provider who wishes to gather and provide the data to the reporting entities
We envisage a market arising for data stipulated in Tables 1 and 2 and a number of market players providing this data. Clarity should be established beforehand as to the basis on which this is provided. For instance, will different methodologies / assumptions be accepted, with potentially different figures provided by different data providers? Or will there be one ‘source of truth’ which all CASPs use to report? Will all CASPs be expected to pay a market rate for this data, or will it be made available free of charge? If CASPs are indeed required to pay, will consideration be given to smaller CASPs, noting that the threshold for reporting is significantly smaller than for CSRD?
Aside from the considerations of data provision and cost, we have significant additional concerns as to the feasibility of the specific metrics described in Table 1 and 2. These can be summarised as follows:
- We caution against the inclusion of reporting requirements for energy use / GHG intensity to validate one transaction, at least in the instance of PoW blockchains, for the reasons given previously – this leads to apples and oranges comparisons.
- The wording of ‘Scope 1’ and ‘Scope 2’ in this table is highly confusing. If this data is being reported by CASPs, they should not be reporting other entities’ Scope 1 and 2 emissions – these should only be reported by the reporting entity.
- We consider it very difficult to differentiate between Scope 1 and 2 emissions for the purposes of aggregating carbon emissions for an entire network. Instead, total carbon emissions would be a much more appropriate measure and we recommend that this measure is used instead. We also note that the inclusion of ‘Scope 2 – purchased’ without specifying whether this is market-based, or location-based, or both, is not in line with GHG Protocol disclosures.
- As stated previously, the inclusion of non-renewable energy consumption but not renewable energy consumption offers a one-sided presentation, means there is little incentive in terms of disclosures to transition to renewables, and is not aligned in format with ESRS E1, which requires both.
- Table 1 and Table 2 do not allow for voluntary procurement of market instruments such as offsets or RECs as an additional disclosure. There is therefore currently no mechanism for assessing whether an individual CASP is taking progressive measures or not – or indeed any information to distinguish one CASP from any other. Similarly there is no space for qualitative disclosures around risk etc as per ESRS E1.
- Table 1 includes a requirement to disclose methodology, which we support. We strongly recommend that this is expanded to include a disclosure on assumptions and accuracy of data.
- Energy mix – encouraging additional disclosures that relate only to non-renewable energy mix does not incentivise the disclosure of this data. By highlighting only the ‘bad’ (non-renewable) and providing no facility to report the ‘good’ (renewable) there is little incentive for any CASP to report this.
- Energy use reduction targets – we suggest this should be expanded to include renewables targets. We also seek clarification as to whether this is an energy use reduction target for the entire cryptoasset network, or for the individual CASP. If the target is for the entire cryptoasset network, the addition of an option for CASPs to include disclosure of their own targets would also be beneficial.
- Scope 3 GHG emissions – according to the definition, this relates solely to those that occur in the value chain of network nodes. We note that significant work has been undertaken within the sector recently to establish how Scope 3 emissions in relation to electricity consumption of CASPs can reasonably be measured, apportioned, reported and managed. The CCRI / Southpole methodology provides a mechanism for doing this. For clarity, our reading of the current document is that such metrics would not be required. We think this is a missed opportunity, as long as such reporting requirements are proportionate and reasonable, and we recommend that Scope 3 GHG emissions / electricity consumption apportioned to CASPs should be included.
Q6: Do you agree with ESMA’s description on the practical approach to assessing the sustainability impacts of consensus mechanisms? If not, what alternative approach would you consider suitable to assess these impacts?
Whilst we broadly agree with the requirement for a high level of sustainability disclosure, and support the introduction of a proportionate sustainability disclosure framework within MiCA, we have some unanswered questions about the approach proposed.
- To recap, we wish to draw attention to point 46 ‘the certainty provided in the draft RTS should enhance the availability of sustainability data in relation to crypto-assets ahead of the application of MiCA requirements by end 2024’. We agree that certainty is required, and we welcome the intent shown by this draft RTS. However we are concerned that, due to the number of significant questions the draft RTS raises (see response to Q1 for summary) the draft RTS may actually create further uncertainty in the market. As flagged throughout this response, this includes some fundamental questions. Does Table 1 consist of data which is common to all CASPs that transact a particular cryptoasset? Will data that is tailored to the individual CASP and their apportionment in relation to the entire network be included (our recommended approach)? How will CASPs (or entire cryptoasset networks) be incentivized to take positive action – in terms of the cryptoassets they support, or targets they set, or renewable energy they procure – if all the indicators focus on ‘adverse’ impacts? How will alignment with ESRS E1 be assured if only adverse impacts are considered under MiCA but potential positive and negative impacts are considered under ESRS E1? We strongly encourage that further information is provided in these areas in advance of the final RTS being published – only then will market certainty be provided.
- With key questions currently unanswered, it is currently difficult to provide suggestions as to alternatives – although we remain very open to doing so and invite ESMA to contact us directly for further discussion, if appropriate. Some key areas to address are (1) will the disclosure requirements incentivise positive change in the crypto ecosystem (2) will the focus on ‘per transaction’ footprint give a useful comparative tool? (3) can the proposals be claimed to ‘ensure complementarity and consistency, and avoid increasing the burden on companies’ (MiCA Art 7) (4) do they succeed in providing retail investors with a presentation that is ‘fair, clear and not misleading’ (MiCA Art 24). Our initial review of the draft would suggest that the answer to all these questions may currently be no.
Q7: Do you agree with the definitions proposed in the draft RTS, in particular on incentive structure and on DLT GHG emissions? If not, what alternative wording would you consider appropriate?
We have comments on the definition of ‘incentive structure’ and ‘scope 3’, as set out below.
Incentive structure: the wording from the draft RTS is as follows:
(a) ‘incentive structure’ means the set of incentives and penalties that a consensus mechanism uses to economically incentivise distributed ledger technology (DLT) network nodes to co-operate in applying the rules and procedures of the consensus mechanism for the purposes of validating transactions
We have highlighted the wording that we propose an alternative to. We suggest that this wording is changed to:
‘…rules and procedures of the consensus mechanism to achieve common agreement’
We propose this change in line with our earlier comments in relation to transactions not being the primary driver for network participation in certain circumstances e.g. PoW.
Scope 3: the wording in the draft RTS is as follows:
(e) ‘scope 3 DLT GHG emissions’ means all indirect GHG emissions that are not covered by points (3) and (4) that occur in the value chain of the DLT network nodes applying the rules and procedures of the consensus mechanism, including both upstream and downstream emissions;
This definition suggests that Scope 3 applies only to the upstream and downstream carbon footprint of the network nodes (manufacture, end of life treatment). This definition of Scope 3 appears to be narrow and omits two important aspects:
- Scope 3 carbon footprint of CASPs (apportioned electricity consumption of the cryptoasset network that each CASP is responsible for)
- Nuances involving assets at application level. Assets tied to specific networks such as BTC and ETH are relatively straightforward to model electricity consumption. However other cryptoassets exist that leverage the security of a layer 1 level but sit on a separate network. Furthermore some protocols are cross-deployed on a number of blockchains.
We believe that there is a missed opportunity here. Previous comments about proportionality notwithstanding, the RTS currently appears to mandate that all CASPs that trade in a particular cryptoasset report the same metrics for that cryptoasset at network level, irrespective of the size of the CASP or the size of their holdings in that cryptoasset. We recommend that there be a requirement (optional?) for CASPs to report the electricity consumption network share. (The current CCRI / Southpole methodology provides a mechanism for this).
This would further serve to incentivise action from CASPs to reduce their own carbon footprint / network share of electricity consumption and take positive action.
Q8: In your view, are the proposed mandatory sustainability indicators conducive to investor awareness? If not, what additional or alternative indicators would you consider relevant?
Importantly, current metrics as required in Table 1 and Table 2 do not allow trends or improvements to be seen – they only allow for absolute values on an annual basis, with no scope for comparing trends over time. As previously stated, the focus on ‘adverse impacts’ does not allow for reporting on renewable energy use and the use of market-based accounting under the GHG Protocol. This does not appear to meet the needs of investors, who will want to assess what action a company is taking and may also wish to compare if one blockchain / cryptoasset or CASP is more / less progressive than another.
Overall, a one-size-fits-all approach in terms of metrics may not be appropriate. Instead, disclosures should be considered separately for each consensus mechanism. Taking WEEE waste as an example – in the case of certain proof of work cryptocurrencies (e.g. Bitcoin) specialist hardware such as ASICs will be used and as they are used solely for mining, any waste hardware can be attributed directly to the mining of cryptocurrency. Other Proof of Work cryptocurrencies, such as Monero or Ravencoin, achieve Proof of Work consensus utilising GPUs and CPUs, which can be run from specialised equipment or standard IT equipment. For other consensus mechanisms there may not be such a direct link between the process of mining / validation and the creation of WEEE. This may be because (1) some consensus mechanisms do not have specialist hardware requirements and therefore standard IT equipment is used, and conducts tasks other than validation (2) standard WEEE waste for validation is produced alongside other standard IT waste e.g. in an office environment. Finally (3) even if in the above scenarios WEEE waste for validation can be separated from others, in many cases it may not be significant in size and such requirements may not be proportionate. In such cases internal record keeping will be required to keep records of validation WEEE as opposed to any other type of WEEE – this raises questions of audit, and proportionality.
In our view, indicators (optional or otherwise) must be included to differentiate and incentivise CASPs that are taking positive action. This may include, but is not limited to: engaging in industry guidance, quantifying their share / their customers’ share of network electricity consumption / GHG emissions, use of market instruments to compensate for this.
Q9: Do you consider the proposed optional sustainability indicators fit for purpose? If not, what additional indicators would you consider relevant? Would you agree to making these optional sustainability indicators mandatory in the medium run?
In summary, while we support proportional sustainability disclosures, we do not consider the proposed optional sustainability indicators fit for purpose for the reasons already stated.
For the avoidance of doubt, these reasons are:
- Omission of ‘renewable energy’ whilst ‘non-renewable energy’ is included.
- Lack of incentive for CASPs to take progressive action due to the fact that positive indicators are not included and the indicators are not currently contextualised.
- Lack of regard for the size of a CASP / their network share and subsequent lack of ability of investors to make meaningful comparisons to aid investment decisions.
We therefore recommend that the following are included:
- An indicator for ‘Renewable energy’
- Electricity consumption / GHG emissions apportioned to each reporting CASP (i.e. for their use of the cryptoasset network, or other appropriate apportionment – (see CCRI / Southpole methodology)
- Indicators that may show progress (positive or negative) over time, which would serve investors (e.g positive actions taken by CASP and / or cryptoasset network, targets for energy / GHG emissions reduction etc)
Q10: Do you consider the principles for the presentation of the information, and the template for sustainability disclosures fit for purpose? If not, what improvements would you suggest?
To repeat key points already made in our response – the information gathered in the templates is biased towards the negative (with the ultimate focus being on ‘adverse impacts’). Given that sustainability disclosures should incentivise positive action, we believe this is a clear omission.
We recommend that space is included in the disclosure framework in order for CASPs to provide suitable context and qualitative information. As an example, BSV uses a fraction of the energy of BTC … but it has been 51% attacked multiple times. The fact it has less of an energy budget protecting it makes it more vulnerable to compromise. We suggest there must be room to communicate these sorts of trade-offs and embed them within disclosures for full investor information.
Q11: In your view, are the calculation guidance for energy use and GHG emissions included in the draft European Sustainability Reporting Standards relevant for methodologies in relation to the sustainability indicators under MiCA? If not, what alternative methodologies would you consider relevant? For the other indicators for which the calculation guidance of the ESRS was not available, do you consider that there are alternative methodologies that could be used? If so, which ones?
Methodologies and standards must be developed for the reporting required under this RTS. As highlighted in Q1, we also recommend that clear guidelines for audit are also provided.
That being said, there are various methodologies currently in use to measure and apportion electricity consumption / GHG emissions in relation to cryptoassets. Some of these are specific to a given cryptoasset, and others can be applied more widely.
The methodology which has gained most traction and appears to be most aligned to the GHG Protocol and ESRS E1 is the CCRI / Southpole methodology. However, we understand that this may not be applicable in all cases and encourage further work in this area.
Q12: Would you consider it useful that ESMA provides further clarity and guidance on methodologies and on recommended data sources? If yes, what are your suggestions in this regard?
Yes, we absolutely encourage this. This is an area where clear guidance, standards and frameworks are required. Whilst significant work has been undertaken by the sector in recent years, notably through forums such as the Crypto Climate Accord, World Economic Forum and Global Digital Finance, it should be stressed that guidance developed within the sector does not necessarily map to, or have approval from, other standards setters and frameworks such as SBTi.
We strongly encourage ESMA to utilise the knowledge of the sector, including sustainability specialists, to determine how such data can be assembled, used and audited. We at ETST invite ESMA to engage with us if we can support this process. For ease of reference please contact email@example.com directly for further information.
The ETST appreciates the opportunity to respond to this consultation,and we are committed to continuing to support ESMA in developing MiCA sustainability requirements that are proportionate, serve investors and drive positive change in the sector.